Tax Depreciation: Land, Building Basis, and Recovery Periods

For a simplified full-year tax-depreciation problem, identify the building's depreciable basis, exclude land, and divide by the stated recovery period. Do not automatically divide the property's current market value by 27.5 or 39.

Federal tax references checked October 18, 2026. The examples below state their assumptions and explain course math.

Separate the land from the building

Land is not depreciable. When a purchase includes land and a building, the cost must be allocated between them. Tax basis can include applicable acquisition costs and adjustments; it is not automatically today's appraised value. The IRS explains land allocation and basis in Publication 527, Residential Rental Property.

If an exercise gives a total cost basis of $650,000 and explicitly allocates 20% to land, with no other adjustments:

1. Land basis: $650,000 × 20% = $130,000.
2. Building basis: $650,000 − $130,000 = $520,000.

Equivalently, $650,000 × 80% = $520,000. The 20% is the land portion to remove, not the building portion to depreciate. If a question gives only market value and does not establish basis, more information may be needed.

Choose the recovery period

These categories generally use straight-line depreciation and the mid-month convention. Other assets, special rules, and the Alternative Depreciation System can have different treatment. Do not extend the building rule to every improvement or piece of equipment. See IRS Publication 946 and the Form 4562 instructions.

Worked example: simplified full-year deduction

Assume the $520,000 building basis above belongs to an ordinary nonresidential warehouse using a 39-year GDS recovery period. The question asks for a full-year straight-line amount, with no first-year or final-year adjustment.

$520,000 ÷ 39 = $13,333.33, rounded to cents.

For a separate residential rental example with a $275,000 building basis, the simplified full-year amount is $275,000 ÷ 27.5 = $10,000.

Why might the first-year answer differ?

The mid-month convention treats qualifying real property as placed in service in the middle of the month it becomes available for its income-producing use. That makes a first-year deduction different from a full-year amount. A purchase date alone does not always establish when a rental was placed in service.

For a simplified calendar-year illustration, a property placed in service during July has 5.5 months under the mid-month convention. A $12,000 full-year amount would produce $12,000 × 5.5 ÷ 12 = $5,500 before any table-rounding differences. Use the required IRS table or stated method when the question calls for it.

Try three practice questions

1. Total cost basis is $500,000; 22% is allocated to land. What is building basis?
2. Using that building basis for an ordinary 39-year nonresidential building, what is simplified full-year depreciation?
3. A residential rental building's depreciable basis is $330,000. What is its simplified full-year amount over 27.5 years?

Answers and explanations

1. $390,000: $500,000 × 78%.
2. $10,000: $390,000 ÷ 39.
3. $12,000: $330,000 ÷ 27.5.

Keep studying

Tax depreciation allocates tax basis; appraisal depreciation addresses loss in value. Identify which meaning the question uses. See the real estate math guide and all exam-prep resources. For course help, send the question number and your work. For an actual tax return, use the applicable year's IRS guidance and a qualified tax professional. These are original study examples.